Being able to sell your own company tax-free sounds like a wishful thinking of many entrepreneurs. This is quite possible to a certain extent. Because with the appropriate tax design model, many legal options can be used. They range from a taxation deferred indefinitely to a tax-free sale. In addition, these useful options are available to both sole proprietorships and partnerships. And of course, corporations and their shareholders can also use them to their advantage. Even buyers can benefit from some of these design models. First and foremost, it is important to divide business divisions according to the level of taxation, so that general taxation of the entire profit is avoided. Only in this case can the statutory options be fully used in the favourable taxation of the profit from the sale.

Company sales without taxes: 2 examples of tax-free corporate structures

In the video we explain with which corporate structures you achieve a tax-free sale.

Selling company tax-free: is this possible?

If you want to sell your company, you usually expect to pay taxes on the profit made. However, in many cases this is to some extent preventable. It is irrelevant whether the firm is a sole proprietorship, a partnership or a corporation. However, prior to the sale, the appropriate conditions must be created which give rise to a certain tax advantage in the case of the pending sale in accordance with the tax laws.

In fact, there are many different ways to save a large percentage of the taxes that would arise if you ignored these specifics. Even a tax of just 3% on capital gains is possible. However, this can only be realized in very special situations.

Therefore, in this post we dedicate ourselves to some options that, on the one hand, lead to a considerable saving in taxes when selling a company. On the other hand, they can also be achieved with only minor adjustments. In the following, we describe an easy-to-understand example for three different starting situations, with which we explain the necessary structures that lead to tax savings.

Sell sole proprietorship and save taxes: an example

1.1. The starting situation for our example

Start with the sale of a sole proprietorship. It belongs to Mr. Max Fit, who has set up a fitness center in his own company building with extensive business equipment and several employees.

Recently, Mr. Fit received a lucrative purchase offer for his company, which he would only like to accept. But it is questionable whether the tax then incurred on the sales profit could be reduced or even avoided altogether. And since he asks himself this, but knows no answer, he finally asks us as his reliable tax consultant.

1.2. Tax optimization and taxation when selling the company

Consequently, we recommend Mr. Fit to mentally separate the company into two areas. On the one hand, the company should comprise the actual operation, i.e. the business facility, the staff, the customer base and, of course, the company value. On the other side is the building. The profit from the sale of the company, which is attributable to the building, should then be treated separately for tax purposes.

The reason for this division lies in the possibility of booking the profit from the sale of the property in a special reserve. While the profit from the sale of the company’s operating share is subject to full taxation, this reserve, named in accordance with the corresponding law § 6b EStG, can avoid taxation of the profit for the next four years.

Accordingly, the purchase price must also be negotiated. Because the higher the share of the property value, the more profit can be kept in the reserve for reinvestment. And of course, the tax on the operating share is also significantly lower.

Should the reserve remain unused during this time, of course a corresponding taxation of the profit takes place. However, if you reinvest the profit in a new property within this period, the share of the profit attributable to the sale of the property remains tax-free. However, this share must also be entered in the books when acquiring the new property. Therefore, the reinvested, tax-free profit reduces the depreciation volume of the new acquisition.

1.3.Can a small company also use the reserve according to § 6b EStG?

A further note: If you read through the legal text of paragraph 6b EStG, you will find that the law requires the company to draw up balance sheets. However, this would exclude many sole proprietors from using this option. Thus, § 6c EStG has created the basis for entrepreneurs who determine their profit by revenue surplus calculation to use this option.

In our second example, we want to change the first one a little. For this purpose, we provide Mr. Max Fit Lisa Fit as a wife. In this example, the building where Mr. Fit’s company operates her business is said to belong to Mrs. Fit. For more than ten years she has rented it to her husband’s company.

Again appears an interested party who wants to acquire both the company and the building. Now that the offer seems worthwhile, Lisa and Max Fit decide to sell both the building and the company to the interested parties. As a result, both spouses are involved in taxing the sales profit. However, while Mr. Fit has to pay full tax on the profit from the sale of his company, Mrs. Fit is pleased because she had rented the property for more than ten years. In such a case, § 23 EStG provides that the profit remains tax-free.

If Mr. and Mrs. Fit now agree among themselves, then you can negotiate the purchase contracts for the company and the building with the buyer in such a way that as large a share of the profit as possible flows to Mrs. Fit. Accordingly, the selling price that Mr. Fit receives for his company is lower. But that is the intention. Because this also reduces the tax that Mr. Fit has to pay on the profit. Nevertheless, it is guaranteed that the buyer pays an overall balanced price.

4. Sale of a limited liability company

In our third example, Mr. Fit’s company should exist in the form of a GmbH. Mr. Fit got our advice early on in order to be prepared in case the company is to be sold one day. Therefore, following our advice, he has positioned the building outside his company in a GbR, which he manages together with his wife. The participation structure in the GbR can be very variable. Even a participation ratio of 99% to 1% is quite conceivable. In any case, the GbR now leases the building to Mr. Fit’s GmbH.

By the way, this structure also has two other advantages. On the one hand, the rents as operating expenses reduce the taxable annual profit of the GmbH. And secondly, the GbR can also claim tax depreciation on the property for itself. But this is only marginal.

After more than ten years, the sale of the company is now also pending in this case. Again, both the company and the building will be sold. Again, the profit from the sale of the company is taxable, while the profit from the sale of the building remains tax-free.

Of course, it also applies at this point that you should use all legal possibilities in the design of the purchase contracts in order to keep the profit share that is attributable to the company as low as possible. In return, the profit share of the property must be increased as much as possible. Although this is then associated with a higher real estate transfer tax on the part of the buyer, this is ultimately a question that is negotiable.

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